Jean-Marc Tirard lifts the lid on the Gallic view of trusts, and explains why the French taxman’s ‘appalling’ treatment of Anglo-Saxon trusts may put off HNW families for good.
The French government does not like trusts. It regards them as a bourgeois ‘Anglo-Saxon’ invention designed to keep money within tight-knit circles of excessively wealthy families. Trusts have been used as the scapegoat for the French budget deficit and the symbol of tax evasion and aggressive tax avoidance. This attitude is summed up by a French member of parliament, who, in a demonstration of Gallic revolutionary spirit, wrote that the trust was an ‘opaque entity whose sole purpose was to hide money’.
It is also evident in the rather contradictory approach of the legislature. Although the French courts have actually recognised trusts as valid and legitimate estate planning tools, the French fiscal administration passed legislation aimed specifically at discouraging the creation of trusts with French connections through exceptionally harsh tax treatment, perhaps as a way of spreading some of that excessive wealth around.
The assets of all trusts, including full discretionary trusts, are treated as if they were the settlor’s own assets for wealth and inheritance tax purposes. This means that during his or her lifetime, the French resident settlor has to pay tax on the trust’s assets, and when he or she dies, the inheritance tax is due immediately, even if the assets are not passed on to the beneficiaries. This tax treatment applies when a trust has a French resident settlor and/or beneficiary, even if all other beneficiaries are non-residents, and/or own assets located in France. Whether or not the settlor has retained powers, and is or is not a beneficiary of the trust, does not make any difference.
Another remarkable feature of the French law on trusts is the substitution of the settlor for the beneficiaries. After the settlor dies, the beneficiaries immediately stand in his/her shoes and become subject to the same tax obligations.
Income tax is only due when the trustees make a distribution of income to a French resident beneficiary, but the French tax authorities often claim that trusts are also transparent for income tax purposes under all circumstances – meaning the beneficiaries are taxed on the trust’s income. This is an appalling misinterpretation of the 2011 law, which should be strongly resisted. It is also not uncommon for certain tax inspectors to try and apply the new tax treatment of trusts retroactively to take into account pre-2011 tax years. If you find yourself in this position, don’t just assume the French taxman is right – get help to make sure your Anglo-Saxon trust is not being exploited.
In addition to onerous taxation, trustees are subject to extensive reporting obligations. They must inform the tax authorities within 30 days of the creation, termination, or any modification to a trust. They should also report annually on 1 January the market value of the trust’s assets.
In another example of the French government’s attempt to spread the wealth, failure to comply with any of these reporting obligations gives rise to a harsh and, arguably unconstitutional, penalty of 12.5 per cent of the value of the trust’s assets. If the trust’s assets have not been included in the tax returns of the settlor, or deemed settlors, a 1.5 per cent special tax is levied on the trustee.
Worse still, the French tax authorities recently decided that the information provided by the trustees (with the exception of the market value of the trust’s assets) will be placed in a central, public register of trusts. Any individual with a tax number is able to access this register, for whatever purposes, and identify, without restriction, the settlors and beneficiaries of a trust. The risk of kidnapping, blackmail or intimidation is apparently irrelevant to the French tax authorities.
This is an obviously appalling and marked departure from the general principles of the right to personal privacy and confidentiality, and the right to the protection of personal data. It has, thankfully, already been challenged. In another example of the French legislature and the courts having very different opinions, on 19 July, the Conseil d’Etat (the French Administrative Supreme Court) issued an order suspending public access to the Registry until a decision is handed down by the Constitutional Council.
It is against this disconcerting background that the French Government has announced that it will ‘roll out the red carpet’ for City employers and employees who may contemplate relocating after Brexit.
Paris is, however, a less than obvious choice, with an effective marginal income tax rate due on worldwide income that may exceed 65 per cent, and a wealth tax of up to 1.5 per cent due on worldwide assets (even if these are held in trust), irrespective of whether or not they generate any income.
To alleviate this unattractive situation, individuals who transfer their tax residence to France are currently exempt from wealth tax on their assets located outside France for five years, and the French prime minister announced on 6 July that this period might soon be extended to eight years. In addition, employees who are hired outside France, or transferred to the French affiliated company of a foreign group, are exempt from income tax on their impatriation bonus.
France doesn’t appear to be able to decide whether it wants to attract wealthy individuals or discourage them. When the facts are weighed up, however, most HNWs are likely to feel extremely discouraged.
Jean-Marc Tirard is an international private client partner at global law firm McDermott Will & Emery.